February 27, 2013
Last Week in Review
The debate within the Fed about whether to continue their latest round of bond buying, known as Quantitative Easing, continues.
Table Source: Mortgage Success Source
What is Quantitative Easing?
Quantitative Easing is the concept of the Fed becoming a buyer of Treasuries and bonds to try to stimulate the economy.
Why does the Fed do Quantitative Easing?
the Fed does Quantitative Easing to create inflation and avoid a
deflationary economy. It’s also used to help lower the unemployment rate
and boost stock prices. For this latest round, the Fed especially
wanted to help stimulate the housing market and our economy overall.
The housing market has shown signs of improvement lately. While
housing starts in January declined overall, single family housing starts
rose to their highest rate since July 2008. Building permits, a sign of
future construction, also came in above expectations. These reports
were the latest in a series of reports showing that the housing market
Last week, the minutes from the Fed’s January meeting of the Federal
Open Market Committee noted that several Fed members would like to halt
the Quantitative Easing program sooner than planned, because they are
concerned about inflation. However, it’s important to note that last
week’s Producer and Consumer Price Index Reports showed that inflation
at both the wholesale and consumer levels remained moderate in January.
On the reverse side, other Fed members are concerned that halting the
program too soon could end the recovery in the housing market, and
hinder our economic recovery overall.
The biggest take away is that home loan rates continue to remain near historic lows.
Forecast for the week
A busy week of reports is ahead, with news on housing, manufacturing, consumer sentiment, U.S. growth and inflation.
- The week starts and ends with a measure of how the consumer is feeling with yesterday’s Consumer Confidence Report and last week’s Consumer Sentiment Index.
- Look for Pending Home Sales today.
- We’ll get a sense of how the economy is doing with today’s Durable Goods Orders, which measures orders for products used for an extended period of time, and this week’s Gross Domestic Product, the biggest picture of economic activity.
- Also later this week Weekly Initial Jobless Claims will be reported.
- Late in the week also brings Personal Consumption Expenditures, the Fed’s favorite measure of inflation, along with Personal Income and Spending and the ISM Index.
Remember: Weak economic news normally causes money to flow out
of stocks and into bonds, helping bonds and home loan rates improve,
while strong economic news normally has the opposite result.
you can see in the chart below and as mentioned above, inflation
continues to remain moderate. Remember that inflation negatively affects
bonds because it hurts the value of fixed investments like bonds.